16 June 2020

We contributed to the EU Non Financial Reporting Directive public consultation!

The European Commission is presently revising its Non-Financial Reporting Directive (NFRD). Their aim is to publish an updated version by the end of this year or early 2021. As part of this revision, the European Commission initiated a public consultation to capture the current opportunities to improve the quality of non-financial information and lower the burden associated with these disclosures. The public consultation ended last week; we took the opportunity to share our expertise and vision with the European Commission!

There is currently an increasing demand for transparency, especially from investors regarding the non-financial performance of companies. Among others, this is due to the EU Green Deal; a set of European initiatives and policies launched early 2020, to achieve the goal of being carbon neutral by 2050. One way to achieve this goal is to finance the transition towards a greener future. Sustainable finance is and will, therefore, remain a high topic on the agenda of the European Commission.

But sustainable finance can only be achieved with higher transparency and reliable non-financial information. The EU is, therefore, willing to foster the change, thanks to the new EU Taxonomy and its Non-financial Reporting Directive (NFRD).

We highlighted some key aspects the Commission is reviewing and our viewpoint on it:

Scope on the type of companies the NFRD should apply:

  • What can we learn from the consultation?
    It looks like the Commission is willing to broaden the current scope of companies that have to disclose their non-financial information. The EU is even considering including SMEs!
  • What is our vision?
    We believe the current scope is limited, especially if the aim is to achieve a real shift in transparency. For this reason, we think it would be worth expanding the scope to at least all listed companies (no matter their size); large non-listed companies established in the EU but listed outside the EU, and large non-listed companies not established in the EU that are listed in EU regulated markets.

Clarification on the concept of materiality:

  • What can we learn from the consultation?
    It seems that the Commission is willing to further build the NFRD on the concept of materiality.
  • What is our vision?
    As to ensure a reliable materiality assessment, we believe that the NFRD should provide more clarification on the process of a materiality assessment: e.g. how often should a materiality assessment be realized, whether a consultation with stakeholders has to be performed, whether the disclosures of the results in a so-called materiality matrix is required, etc. Further looking at the definition, the concept of double materiality from the Commission is interesting but it complexifies tremendously its understanding. We believe the definition should rather be kept simple and understandable for everyone – and, especially if the aim is to enlarge the scope of companies to report.

Harmonization of non-financial reporting standards:

  • What can we learn from the consultation?
    It looks like the Commission is currently considering the development of a European non-financial reporting standard.
  • What is our vision?
    We believe that harmonization of the non-financial reporting landscape is a necessity. A European non-financial reporting standard could therefore help in bringing consistency in disclosures and help reporting companies finding their way in the increasing amount of standards and frameworks. However, we strongly think that the Commission should build on the work already performed by seeking alignment with existing reporting standards, such as the EU Taxonomy, SASB, IIRC, TCFD, and GRI.

Reliability of non-financial information:

  • What can we learn from the consultation?
    Given that non-financial information is increasingly important to investors and other users, the Commission is willing to improve the reliability of the disclosed data, by considering external assurance on non-financial disclosures.
  • What is our vision?
    Reliable data is key – however it should not necessarily be guaranteed by an external assurance performed by accredited accountants – other forms of validation could be referred to. Examples are requesting external assurance every 3 years, having an external party or internal auditors perform data validation, or having external accountants only verifying the work performed by internal auditors.

Any thoughts on the matter? Let us know!

Author: Lola Debersaques.